Commodities
Why do big companies refuse to produce more oil and gas production?
Major companies are refusing to produce more oil and gas production. The energy giants are still reeling from the recent collapse in oil prices and are unwilling to take risks.
Now that oil prices are much higher than $100/bbl, you can hear the question on every corner: why don’t the world’s energy giants take advantage of such a good opportunity and drill huge numbers of new wells to make billions on high prices?
The World Community is Asking OPEC to Produce More Oil
There are many reasons for this strange behavior, but analysts generally name three. Firstly, oil companies have not yet fully digested the trillion-dollar losses of the last decade. Second, expensive gasoline does not yet mean high profits for oil companies to justify the development of new fields.
And third, the growing popularity of electric vehicles makes most oil companies satisfied with the bird in the hand in the form of already developed wells, which now bring good profits; rather than chasing the crane in the sky, i.e., super profits, the hunt for which carries huge risks. Will Saudi Arabia produce more oil?
There is no definite answer. The first reason – the losses of the past years are mostly psychological in nature, but this does not make them any less strong. Because of the collapse in the oil markets in the middle of the last decade, oil companies lost over $1 trillion. For example, among the four oil giants covering all areas of the oil industry, from exploration of new fields to equipment and well maintenance: Royal Dutch Shell, Occidental Petroleum, Transocean and Halliburton, only one company – Shell – managed to make money rather than incur billions of dollars in losses in 2014-18.
It also answers the question of why Canada doesn’t produce more oil. The events of 2014-20 taught oil workers to be cautious and to always remember that high prices can collapse at any moment, and that a company that forgot about this and invested all its money in exploration and expansion of production is likely to go bankrupt.
Life has taught oil companies that it is safer to be conservative regarding costs, i.e. not to invest everything they have, no matter how much they might want to, in exploration and production. That’s why many oil companies have such low budgets for these items, despite the ideal market situation.
It might seem that you can forget about caution when prices are at, say, $120 per barrel, but the fact is that the oil markets are not ruled by arithmetic, but rather by higher mathematics.
For example, the oil markets are now in a situation described by the English word “backwardation,” when oil prices are currently higher than futures prices. In deciding whether to invest in new wells, an oil company director should analyze not the current oil prices. but the prices of the time when the first barrels of oil will be extracted from the new wells. If, for example, we are talking about the end of 2023, we can expect to be able to sell it for a maximum of $78 a barrel. That’s well below $97.5 a barrel on the spot market. Earlier, producers began to produce more oil as Iran’s supply fell.
If you add conservative thinking to backwardness, it becomes more or less clear why new wells are not growing like mushrooms after the rain and why oilmen and investors are in no hurry to “bury” big money in the ground.
Situation in the oil markets is slowly changing
Despite the above-mentioned reasons, the situation in the oil markets is slowly changing. The number of working rigs has now reached a two-year high, and in the next few months it may reach pre-pandemic levels.
Production is growing very slowly, but still. But it is not growing fast enough if there is a collapse in oil prices. This means that the cash flows that oil companies are generating at the moment should continue indefinitely until demand drops.
Contributing to oil companies’ reluctance to take risks and invest in new production are electric cars. Last year, one in 12 new cars sold was electric (8.6%). Data for the first six months of 2022 suggest that this figure could grow by about 50%.
Naturally, such rapid development of electric cars cannot help but get on the nerves, and confidence of oil companies. Few people want to increase production when they realize that the main consumer of oil, i.e. cars, is increasingly switching to electricity.
By Laila Kearney and Georgina McCartney
LONDON (Reuters) -Oil prices slipped on Friday and were on track for a third consecutive weekly decline, pressured by muted demand in China and hopes of a Gaza ceasefire deal that could ease Middle East tensions and accompanying supply concerns.
futures for September dipped 56 cents to $81.81 a barrel by 1250 GMT. U.S. West Texas Intermediate crude for September fell 40 cents to $77.88.
For the week, Brent is trading down almost 1% while WTI is down more than 2%.
Recent data, such as July 20 figures showing that China’s total fuel oil imports dropped 11% in the first half of 2024, have raised concern about the wider demand outlook in China.
In the Middle East, hopes of a ceasefire in Gaza have been gaining momentum.
A ceasefire has been the subject of negotiations for months, but U.S. officials believe the parties are closer than ever to an agreement for a six-week ceasefire in exchange for the release by Hamas of female, sick, elderly and wounded hostages.
Oil price declines were capped, however, by threats to production from Canadian wildfires, a large stocks draw and continued hopes of a September cut to U.S. interest rates after strong economic data, said PVM oil analyst Tamas Varga.
Investing.com– Oil prices fell Friday, on course for a third consecutive losing week as concerns over sluggish demand conditions in Asia weighed.
At 09:00 ET (13:00 GMT), fell 0.9% to $81.62 a barrel, and dropped 0.8% to $77.66 a barrel.
Crude set for third straight week of losses
Both benchmarks are on course for another losing week, the third in succession, with down just under 1% and WTI nearly 3% lower.
Persistent concerns over slowing growth and demand in top importer China have been the dominant factor, part triggered by GDP data from last week, which showed the Chinese economy grew less than expected in the second quarter.
Additionally, more data this week showed the country’s apparent oil demand fell 8.1% to 13.66 million barrels per day in June.
Beijing unexpectedly cut a swathe of lending rates this week, further trying to loosen monetary policy amid growing concerns over sluggish growth.
Apart from China, uncertainty over Japan also grew following middling , while weak activity data in Europe also pointed to economic woes.
Gaza ceasefire in focus
Also weighing on the crude market have been increasing hopes of a ceasefire in Gaza.
The leaders of Australia, New Zealand and Canada called for an immediate ceasefire in a joint statement on Friday, while U.S. Vice President Kamala Harris has pressed Israeli Prime Minister Benjamin Netanyahu to help efforts at reaching a deal, striking a tougher tone than President Joe Biden.
A ceasefire has been talked about for months, but if it was to occur then some of the risk premium could be removed from the market.
Strong US GDP, rate cut hopes offer some support
On the flip side, data, released on Thursday, showed that the U.S. economy grew more than expected in the second quarter, despite pressure from high rates and relatively sticky inflation.
The reading drove up hopes that the world’s biggest fuel consumer was headed for a “soft landing,” where economic growth remained steady while inflation eased.
These hopes were also lifted by the data showing overall U.S. inflation cooled as expected in June.
According to data from the Bureau of Economic Analysis, the (PCE) price index slipped to 2.5% in June, from 2.6% the prior month. .
Stripping out volatile items like food and fuel, the year-on-year “core” gauge, widely known as the Fed’s preferred gauge of inflation, remained at 2.6%, only marginally above the Federal Reserve’s 2% target.
This sparked increased optimism over a potential interest rate cut by the Federal Reserve in September.
Data showing steady drawdowns in U.S. also offered some positive cues to oil markets, as fuel demand in the country remained robust amid the travel-heavy summer season.
(Ambar Warrick contributed to this article.)
(Reuters) -A wildfire reached the Canadian town of Jasper, Alberta on Wednesday, one of hundreds ravaging the western provinces of Alberta and British Columbia, as firefighters battled to save key facilities such as the Trans Mountain Pipeline, authorities said.
Wildfires burning uncontrolled across the region include 433 in British Columbia and 176 in Alberta, more than a dozen of them in the area of Fort McMurray, an oil sands hub.
The pipeline, which can carry 890,000 barrels per day (bpd) of oil from Edmonton to Vancouver, runs through a national park in the Canadian Rockies near the picturesque tourist town, from which about 25,000 people were forced to evacuate on Tuesday.
“Firefighters … are working to save as many structures as possible and protect critical infrastructure, including the wastewater treatment plant, communications facilities, the Trans Mountain Pipeline,” Parks Canada said in a post on Facebook (NASDAQ:).
The pipeline operator did not immediately respond to a Reuters request for comment, but said earlier it was safely operating the pipeline and had deployed sprinkler protection as a preventive measure.
In the day’s last update, Jasper National Park said it could not report on the extent of damage to specific locations or neighbourhoods, and that it would provide further updates on Thursday.
Canadian Prime Minister Justin Trudeau said his government approved Alberta’s request for federal assistance.
“We’re deploying Canadian Armed Forces resources, evacuations support, and more emergency wildfire resources to the province immediately – and we’re coordinating firefighting and airlift assistance. Alberta, we’re with you.”
The town, and the park, which draws more than two million tourists a year, were evacuated on Monday night, at a time when officials estimated there were 15,000 visitors in the park.
Deteriorating air quality forced firefighters and others lacking breathing equipment to evacuate to the town of Hinton, about 100 km (62 miles) away, park authorities said on Facebook on Wednesday evening.
Officials of Parks Canada earlier said they expected rain to arrive overnight.
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